Basic 1031 Exchange

There are many reasons why someone may choose to do a 1031 exchange, like expanding their portfolio, consolidating, or increasing their cash flow. It is a great method for investors who want to defer capital gains tax and have more cash to reinvest with.
What we most commonly see investors doing is the basic, or forward, 1031 exchange. In this exchange, the taxpayer sells one piece of property, and exchanges it for a like kind piece of investment property. In order to stay within the guidelines of a 1031 to roll the gain forward and defer capital gains tax, there are 6 rules that must be followed:

Real Property Use- Both the old and the new properties must qualify as being held for investment or income producing. This is what the IRS calls like-kind. You can exchange different types of properties, as long as they are both held for investment. For example, you can exchange a piece of land for a condo, or you can exchange a commercial building for a residential dwelling. As long as both properties qualify as held for investment, you are following the first rule of a 1031!

45-Day Identification Period- From the day of closing on the old property, you have 45 calendar days to identify replacement properties for your exchange. You can identify up to 3 properties you would like to purchase as your replacement property. You don't have to buy all 3, but you must buy at least one property from your list. This list can be changed as many times as needed up to day 45, but the last form completed and received by the qualified intermediary by day 45 is the list you must purchase from. Should you list more than 3 properties, restrictions apply that start to complicate the exchange and may put the taxpayer in an undesirable position. Call us if you desire to list more than 3 properties.

180-Day Closing Period- Also starting from the day of closing, you have 180 calendar days to close on your replacement property. The property you choose to purchase and close on must be one from your 45-day list, or the exchange will no longer be valid. These are calendar days, so weekends and holidays do count! There are no extensions to either the 45 day or 180 day time requirement.

Use a Qualified Intermediary- The IRS mandates that you use a Qualified Intermediary (QI) to prepare all legal documentation pertaining to the exchange. Another job of the QI is to hold your money during the exchange period. The IRS will not allow you to have access to the cash, which is where your QI comes in. QI’s are not regulated by the government, so you want to make sure you find a QI you can trust to hold onto your money for you. Here at 1031 Exchange Connection, we have been a trust QI for 15+ years. We are bonded and insured, hold your money at local banks who we have good, established relationships with, and keep your money in its own separate, non-comingled account.

Proper Title Holding- You must purchase and take title to your new property exactly as you held title to your hold property. The titles of the old and the new should mirror each other. For example, if you hold title to your old property in a trust, you should purchase the new property in that trust as well.

Reinvest Requirement- In order to defer all of the capital gains tax, you must purchase a replacement property that is equal to or greater than the net sales price of the old property. Should you decide to purchase something that is lesser in value, that difference is considered as “boot” and is subject to capital gains tax.